Operational Effectiveness

April 8, 2010

This blog post is as more an open question than a pronouncement. So please feel free to comment on this or take the idea in a different direction.

I’ve been thinking about the next generation of Enterprise Applications, the value that they (might) bring, and about how people might justify replacing the enterprise applications they have with the new generation.

Generally speaking, you justify an investment in infrastructure using ROI. You invest this much, get this much return. For the first generation of enterprise applications (most everything designed between 1990 and 2003 or later), this made sense, because they were basically automation apps. They automated work done by people. The ROI showed up because you didn’t have to pay people to do it any more.

Now these new applications simply don’t do that, that is, they don’t automate appreciably better than the old applications do. And this means that ROI is a pretty crummy tool for evaluating whether an investment is worthwhile. Yes, there will be ROI if the enterprise application works the way it’s supposed to. But the return will be highly indirect. You won’t be able to fire people and pay for the application.

Brian Sommer has been talking about this problem for years–essentially, he points out that automating something that’s already automated doesn’t justify an investment on the same scale. But he has never really explored whether there are other forms of justification.

Nenshad argues in his book and his blog that good performance management enabled by modern tools will get you to a place you want to be, and he tells you a lot about how to do it. And while it is true that these new applications help you manage performance better and that’s one of the reasons you want them, he doesn’t offer a way of thinking about justifying the move to what he recommends. (Nenshad, if I missed this in your book, I’m sorry.)

So what does one use? Well, let me offer a concept and sketch it out in a paragraph or two, and you my small but apparently very loyal readership can then take me to task.

I’ll argue that what these new applications really do is improve “operational effectiveness.” What’s that? Well, to start out with, let’s just say that they let each employee put more effort into moving the company forward and less effort on overcoming friction, that is.

Well, that’s suitably hazy. So here are some things that you could measure that would, I think, be indicators that employee effort is more coherent and focused. You could, for instance, take a page from the black belts and measure operational errors or even just exceptions as part of operational effectiveness. Or, you could look at corporate processes that are nominally automated and see whether they are managed by exception. (Truly best, automatable practices should require almost no routine manual actions.)

People sometimes try to look at operational effectiveness by measuring what percentage of revenue is spent on things that feel like pure expense, like IT. So, a company that spends 3% of its revenues is less effective than one that spends 1% of its revenues. People also try to get at it by trying to look at which activities are “value-added” and trying to get people to do more of them. Both ideas are silly, of course, in themselves. (The 3% company may be spending on stuff that makes them effective, while the 1% isn’t.) But I think there might be indicators of operational effectiveness that are better. Wouldn’t operationally effective companies spend less time in meetings, send fewer junk e-mails, work fewer hours/employee (!), resolve more customer complaints and deflect fewer, etc., etc., etc.?

You get the idea, I think. So why is this a good measure for the new generation of applications? Because, bottom line, I think that’s what they’ll do. They’ll help organizations and people avoid wheel-spinning, error correction, and pointless processes or rules by getting to what matters, faster.

Of course, people have always accused me of being a ridiculous, blue-sky, naive optimist. But that’s how it seems to me.

What do you think?


2 Responses to “Operational Effectiveness”

  1. Simon G Says:

    The idea is great, I’m really interested to see what metrics will be created to assess this.

  2. […] This post was mentioned on Twitter by christianlanng, Jon Reed. Jon Reed said: #news Operational Effectiveness http://bit.ly/bFLt8v (via @jonerp) […]

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